Oil Ministry allows drilling in exploration area

The Petroleum Ministry has issued formal orders allowing companies like Reliance Industries and Cairn India to explore oil and gas within the producing fields subject to certain conditions.

Press Trust of India | Last Updated: February 10, 2013 15:07 (IST)

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New Delhi:

The Petroleum Ministry has issued formal orders allowing companies like Reliance Industries and Cairn India to explore oil and gas within the producing fields subject to certain conditions.

The Ministry, which had been sitting on the proposal for over a year, issued formal orders a few days ago permiting exploration in already producing oil and gas fields to help companies augment existing production.

"Government of India has decided that exploration will be allowed in mining lease area with cost recovery on establishment of commerciality," the order said.

All approved exploration costs will be allowed for cost recovery on such declaration of commerciality, it said.

"The contractor will also be permitted to develop and monetise the existing discoveries, if any, in the Mining Lease area (or oil and gas producing region) which could not be developed or monetised earlier because some of the activities may have been in deviation from Production Sharing Contract (PSC) provisions," it said.

After this, companies can drill exploration wells within an oil and gas field, but with the condition that cost recovery of such wells would be allowed only in case there is a commercially exploitable discovery.

This essentially means that cost of drilling any well that does not lead to a discovery, or a small find that could not be independently produced, will not be allowed.

Currently, when a company finds oil or gas in an area, the discovery area is ring-fenced and a mining lease is granted for production of hydrocarbons. Operators get to recover all their cost -- whether successful or failed wells, from the oil and gas produced and sold from that particular block.

The order said past exploration cost in a development area will not be allowed to recover.

It said "any future costs for appraisal, development and production of all such existing discoveries under the new ring-fencing arrangements" will be allowed to be recovered.

The Directorate General of Hydrocarbons (DGH) had previously taken a view that further exploration within this ring-fenced mining lease area is not permitted.

It felt the government's profit share, which is triggered when an explorer recovers all his cost, would be adversely impacted if new costs are added.

RIL and Cairn have maintained that exploration being a continuous process is allowed in the mining lease under which they currently produce gas from eastern offshore and Rajasthan blocks, respectively.

While RIL has proposed to drill an exploration well on the flagging D1&D3 gas fields in the KG-D6 block to study reservoir characteristic, Cairn wants to drill new probes to help raise output from the Rajasthan block to 300,000 barrels per day (bpd) from 175,000 bpd.

Globally, exploration is permitted in fields that are under production so as to keep adding new reserves to replenish ones that have been produced. In absence of rejuvenation, the fields will terminally decline from the day output starts. The same has been followed in fields in Assam and Mumbai offshore.